Shanghai Breaks Ground with Free Trade Zone

amoy

Senior Member
Joined
Jan 17, 2010
Messages
5,982
Likes
1,849
Shanghai Breaks Ground with Free Trade Zone -


(Beijing) – From the Lingang New City in the farthest southeastern corner of Shanghai, heading northern through the Pudong Airport bonded zone and to the Waigaoqiao bonded zone in the north of the city, an area covering almost 28 square kilometers has been officially named a Free Trade Zone (FTZ), the first of its kind on mainland China.

The Shanghai Integrated Free Trade Zone, as the municipal government named it, is designed to be a testing ground for foreign-related reforms in four crucial areas: investment, trade, financial services and regulations.

The proposal to create the FTZ, approved by the State Council in a meeting chaired by Premier Li Keqiang on July 3, would gradually and completely liberalize cross-border trades and allow goods to move freely inside the FTZ.

It covers four existing Customs Specially Supervised Areas (CSSAs) in Shanghai, which are bonded areas where the rules for tax, custom and foreign exchange administration are more preferential than other parts of China.

Differential policies can encourage trade between bonded areas and foreign companies, but because they often differ from one place to another, the compliance cost can run high for some trading companies.

An important task for the Shanghai FTZ is to consolidate the regulations of different CSSAs and reduce administrative costs, said Song Hong, director of the Institute of World Economics and Politics under Chinese Academy of Social Sciences.

In this respect, Shanghai can be a trailblazer for other local governments wanting to integrate their CSSAs, he said, adding: "This alone makes it significant."

The new FTZ, of course, has a much broader agenda. Its proposal plan has laid out a to-do list for things designed to significantly reduce administrative intervention to cross-border capital flows and movement of goods.

Measures being considered include widening the scope of businesses open to foreign investors, relaxing restrictions such as their share ownership ceilings and streamlining procedures by which investments are made.

Most noticeably, the proposal plans says the municipality is working to remove the requirement for government approval in a number of foreign investment areas.

Foreign investors launching a joint-venture with Chinese companies in designated fields will no longer need to hand in a contract to the government for approval – a simple registration will do. And like Chinese companies, they can report and then start a fixed-income investment rather than having to wait for regulatory clearance as foreign investors in other parts of the country must.

Chinese companies in the FTZ will benefit as well, since outbound investments are going to be much easier if the municipal government removes the approval requirement in a number of fields as the proposal plans.

Deepening financial reform is also a top priority on the FTZ's agenda. The proposal says explicitly that interest rates within the FTZ will be liberalized and market forces will determine capital costs.

In comparison, its statement about capital account convertibility is much less straightforward, saying only that pilot programs will be launched when the risk can be controlled.

One possible scenario may involve lifting the quota restriction on the amount of foreign investors' returns that can be converted into yuan, said Liu Hongge, chief economist of CCB International (Holdings) Ltd., an investment subsidiary of China Construction Bank.

Possible changes in the financial sector also include the futures market. Overseas companies, the proposal suggests, can be allowed to trade commodity futures domestically, and the FTZ can set up bonded warehouses for the delivery of commodity futures traded in overseas exchanges. This will reduce transaction costs for many Chinese traders, who now have to use warehouses in South Korea or Singapore.

'Brain, Heart and Toe'

Shanghai has long yearned to combine and upgrade its bonded areas to an FTZ, and it is not the only local government that has the ambition and sees the potential.

Two other port cities, Shenzhen and Tianjin, reportedly filed their applications for an FTZ to the State Council in 2005 or soon after, around the same time Shanghai submitted its proposal.

But Shanghai's proposal did not gain much traction until March, when the premier visited the city and encouraged it to create an FTZ. In the meeting when the proposal was approved, he said the pilot zone will be a crucial component in building an "upgraded Chinese economy."

Shanghai's success has undoubtedly sent a heartening signal to Shenzhen officials striving to make the city's Qianhai zone an FTZ as well. But some are also concerned about competition: like Shanghai's FTZ, Qianhai is also positioned as a testing ground for financial reform, including interest rate reform and capital account convertibility.

In January, a dozen banks in Hong Kong signed yuan loan agreements with companies in Qianhai. This is the only channel for overseas yuan to flow back to the mainland. Many are looking closely now whether this will be challenged.

One official from the Qianhai Administration Bureau, however, shrugged off the concern and said Qianhai and Shanghai are positioned differently.
"Beijing is the brain, Shanghai is the heart and Qianhai is a toe," he said. "Financial innovations can be risky. They are not suitable for the heart but can be tried out on the toe.

"If the trial is successful, it can be copied elsewhere. If not, there is always room for adjustment."

The official also repeated something that has been said often: Qianhai's competitive advantage is its proximity to Hong Kong. So what Qianhai should do, he said, is bring in talents and professional service institutions from Hong Kong and help the former British colony gain better access to the Chinese market.

An executive of a brokerage firm in Shenzhen also said Qianhai does not need to envy Shanghai because it should aim to rival Hong Kong.

Hong Kong's high property prices are one factor that could drive talent to Qianhai, he said, not to mention Qianhai's preferential personal income tax policy.

Reponses from Hong Kong have been mixed. The South China Morning Post, an English-language newspaper, said the establishment of Shanghai's FTZ threatens to eclipse the role Hong Kong plays in China's economy.

Many disagree. Pansy Yau, deputy director of research for greater China at the Hong Kong Trade Development Council, is among those who said it will take time to see what the FTZ can achieve.

"The FTZ is just a big circle that has several bonded areas connected," she said. "If it turns out that its policies are just like those bonded areas, there will be no real impact on Hong Kong's trade."
 

t_co

Senior Member
Joined
Dec 20, 2012
Messages
2,538
Likes
709
Exclusive: Li Keqiang fought strong opposition for Shanghai free-trade zone plan | South China Morning Post

Premier Li Keqiang fought open opposition from financial regulators in his bid to push through a landmark plan for a free-trade zone in Shanghai. It is the clearest sign yet that the nation's new leadership is determined to deliver long-delayed economic reforms.

Financial industry regulators, including the China Banking Regulatory Commission (CBRC) and China Securities Regulatory Commission (CSRC), openly disagreed with Li's plan to open Shanghai's financial services sector to foreign investors.

Three sources with first-hand knowledge of high-level government meetings told the South China Morning Post that Li lost his temper at one closed-door cabinet session. When told of the continuing opposition to his plans, he slammed his fist on the table in frustration.

The sources insisted on anonymity due to the sensitive nature of their disclosures.

"The feedback opinions are not acceptable," say the minutes from Li's office, summarising his response to a CSRC objection in one meeting.

Behind-the-scenes debates inside party headquarters in Zhongnanhai over the Shanghai plan reflect the intense difficulties the new leadership faces in its bid to reform the nation's economic structure.

The sources, who reviewed internal cabinet meeting minutes, said disagreements over new policies were not uncommon among ministries. But it was rare for regulators to team up and fight a premier - China's second most powerful man after the president.

"He has had to fight a lot on this," said one of the sources. "You know Chinese officials. Rule number one: they don't want to lose face. So Li Keqiang is now definitely very keen to make the Shanghai plan a major achievement for his follow-up economic reforms. He will gain political capital for doing this."

Many external analysts believe Beijing's new leadership is anxious to restart a programme of economic reforms considered to have stalled under former president Hu Jintao and ex-premier Wen Jiabao .

Some have argued that President Xi Jinping and Premier Li must deliver on economic reform or risk seeing three decades of rising prosperity slip into reverse, sowing the seeds of social discontent that could cause the party to lose its grip on power.

But those reforms are not without their own challenges. They will throw long-protected areas of the economy directly into the path of efficient global competitors.

The new Shanghai free-trade zone plan, officially announced at the beginning of July, is expected to be the testing ground for major policy reforms. It would promote cross-border commodity and capital flows, with key experiments in freeing foreign exchange markets and liberalising domestic interest rates.

"The Shanghai free-trade zone is like Li's baby," said a government source familiar with the situation. "Perhaps to your surprise, the Shanghai city government didn't lobby the central government too much. It was Li who was very keen to get this done quickly after his trip to Shanghai."

After Li's trip to Shanghai in late March, his first domestic trip after taking office, he began to float the idea of a free-trade zone to Shanghai officials, who felt "overwhelmingly flattered" said another government source.

Li also asked Shanghai officials to provide him a list of the policy changes that the local government believed it would need to attract foreign investments. Dozens of policy initiatives were soon submitted to Li's office.

Within two months, Li made an initial proposal covering 21 initiatives, whose details were not officially announced. These included shortcuts for foreign banks to set up subsidiary or joint venture operations and special permission for foreign commodities exchanges to own warehouses in the free-trade zone in Shanghai, the Post learned from the sources.

But Li did not expect such fierce opposition from subordinates. For example, Li's proposal called for allowing foreign commodities exchanges to set up their own futures delivery warehouses in the free-trade zone. But the mainland's securities regulator did not support the idea, according to government documents seen by the Post.

"At present, the conditions for foreign commodities exchanges to set up futures delivery warehouses in China are not yet well established. The CSRC suggests relevant "¦ information should be taken out of the proposal," the CSRC said in its feedback report on the Shanghai proposal to Li's office, the government documents show.

Li's office fought back strongly.

"Setting up futures delivery warehouses in the Shanghai free-trade zone can replace the functions of those warehouses in South Korea's Busan and Singapore to a very large extent, and the plan can also reduce the trading costs of Chinese enterprises," said a memo sent from his office in reply.

"Commodities trading in the Shanghai free-trade zone will still be considered offshore [trading], so to set up futures delivery warehouses within the zone will not have an impact on domestic futures trading, delivery and pricing system, and it should not have any negative impact on the stability of domestic financial markets," said Li's office in its official reply to the CSRC.

In another case, Li proposed to allow all domestic banks, if they meet certain capital requirements and have operations within the free-trade zone, to provide offshore banking services. In a feedback report to Li's office, the CBRC said it "disagreed with putting this suggestion in the proposal as one of the new 'opening-up' measures," according to government documents seen by the Post. But the CBRC added: "Shanghai Pudong Development Bank, which already has offshore banking certification for a trial business, can be an exception."

Again, Li fought back against the CBRC's concerns.

"The Shanghai free-trade zone is a proving ground for commercial banks to explore how they can manage the risks of offshore banking and then build up a system. Offshore banking will have a very small impact on onshore financial markets and the risks can be kept under control."

In the meantime, other mainland cities, facing unemployment and slower growth, are also keen to follow Shanghai's move to lure foreign capital. But Li is not understood to be interested in rushing to copy the Shanghai model for other mainland cities.
This is what politicians can do when they do not busy themselves with vote banks and pointless homilies to religion, caste, ethnic identity.
 

Latest Replies

Global Defence

New threads

Articles

Top